Bloodbath at stock market as central bank moves to slow down the economy

The capital market witnessed a bloodbath on Monday and plunged to its lowest level in five weeks after the central bank raised its policy rate by 1.5%, which was higher than what most analysts had expected.

The benchmark KSE-100 share index, a gauge to measure market performance, was down 3.3% or 1,344 points, losing $430 million just by noon. The market fell to 39,220 points, its lowest level since October 24 when it hovered at the same level.

Market analysts say a higher than expected increase in the State Bank of Pakistan’s monetary policy rate and a bleak economic forecast dented investors’ sentiments and drove the index down.

On Friday, the SBP increased its policy rate to 10%, beating analysts’ forecast of 1%. The SBP said more consolidation is required to ensure macroeconomic stability because the near term challenges to Pakistan’s economy continue to persist with rising inflation, higher fiscal deficit (where government expenditure exceeds its revenue) and low level of dollar reserves.

The slower growth will have a negative impact on the earnings of every sector, analysts say referring to the SBP’s revised forecast for GDP growth.

The SBP has revised its forecast for economic growth to 4%, down from the previous projection of 5%. “Taking lead from the recent large scale manufacturing data, economic activity is expected to witness a notable moderation [contraction] during fiscal year 2019,” the SBP said, adding that it reflects a ‘short-term cost’ of policy decisions for pursuing macroeconomic stability.

Since January, the central bank has raised its interest rates by 4.25% to slow down spending and cut imports, which have been driving the economic growth. The central bank’s tight monetary stance was a result of higher domestic consumption and excessive demand for imported items that caused the drain of dollars as exports didn’t increase in the same proportion.

The slowdown in commodity producing sectors is expected to limit the expansion in the services sector as well, the SBP said.

The KSE-100 has been declining since mid-November, but a bleak economic outlook and a sharp increase in interest rate further dented investors’ sentiments on Monday. Volatility in exchange rates are also likely to result in inventory losses for some companies, which will trim their earnings.

The SBP says the latest data shows imports have slowed down and there are early signs of improvement in our trade gap, but the economy will continue to face challenges in the near future.